The hope may also be that an end to the long housing bust will bear up other sectors of the economy. Rising home values and new construction should begin shoring up state and local government finances. That will help those governments slow the pace of public-sector employment cuts. If revenues recovery sufficiently, state and local leaders may begin feeling confident enough to start splashing out on new public infrastructure investments that have been mothballed since the recession hit.
While the Fed is applying more pressure to the accelerator and less to the brake, the effect on the economy may only be a modest one if other economic strategies at the state and local level don’t pan out. State and local government budgets are looking stronger, but currently a large collection of temporary tax cuts and spending increases are scheduled to expire all at once at the end of 2012. If Congress can’t negotiate a way to soften the blow, the hit to the economy could be enough to drive it back to the brink of recession, even with the Fed’s new support. And while things look better for housing than they have for a while, a moderate pace of price appreciation is more probable than a new round of soaring values, given the amount of “shadow housing supply” that’s still out there. In other words, the better conditions look, the more owners there will be venturing into the market, finally ready to sell their homes after waiting out the storm.
Yet the trajectory of recovery may very well change in the wake of the Fed’s move. The trends in home sales, architecture billings, and employment growth–a month or two of disappointing figures for every one month of slight upside–may shift in a more positive direction. The building industries have been a long time in the wilderness, and the Fed is determined to coax them out and help them get Americans back to work.
Ryan Avent is the economics correspondent forThe Economist.